Interim Valuations and Payment Provisions

Question 1

What are the two main pieces of legislation regulating payment provisions?

Answer 1

Housing Grants, Construction and Regeneration Act, 1996

Local Democracy, Economic Development and Construction Act 2009

Question 2

What is the contract sum?

Answer 2

In the case of lump sum contracts this is a specified sum written into the contract.

Question 3

What are the primary causes of adjustments of the contract sum for which contracts make provision?

Answer 3

The adjustment of provisional sums

The adjustment of prime costs

Variations to the design/specification

Additions of deduction to scope of works

Loss and expense incurred

Fluctuations in labour and materials costs.

Question 4

What is the interim valuation date and when is it?

Answer 4

The Interim Valuation Date is detailed in contract particulars. The first interim valuation date should not be more than one month after works commence, and thereafter at intervals of no more than 1 month.

Question 5

What is the due date date and when is it?

Answer 5

Due Date: Last date for submission of interim application by the contractor is the due date (maximum of 7 days after the interim Valuation Date)

Question 6

What is the issue date date and when is it?

Answer 6

Issue Date: When Interim Certificate for Payment (payment notice) must be issued (Maximum of 5 days after the Due Date – statute HGCRA)

The payer must issue a payment notice within five days of the due date for payment, even if no amount is due, setting out the sum that the payer considers to be or to have been due at the payment due date, and the basis on which that sum is calculated. Alternatively, if the contract allows, the payee may make an application for payment, which is treated as if it is the payment notice.

Question 7

What is the final date for payment and when is it?

Answer 7

Final Date for Payment: The date the employer has to pay the contractor (14 days after the due date – can be changed in the contract)

Question 8

What is a pay less notice and when must it be issued?

Answer 8

A Pay Less Notice is a written notification from the Payer to the Payee of the Payer’s intention to pay less than the value stated in their previous Payment Notice.

It must be issued a minimum of 5 calendar days before final date for payment (contract can be altered change the period)

Question 9

What is a provisional sum?

Answer 9

An estimated allowance that is inserted into tender documents for a specific element of the works that is not yet defined in enough detail for tenderers to accurately price.

Question 10

What the two types of provisional sum?

Answer 10

Defined provisional sums are those which have been described in sufficient detail that the contractor is expected to have made allowance for them in their programming, planning and pricing preliminaries.

Undefined provisional sums are less well described and so the contractor cannot be expected to make allowance for them in their programming, planning and pricing preliminaries. This means the contractor may be entitled to an extension of time and/or additional payments when the actual works are undertaken.

Question 11

Who’s responsibility is it to issue a valuation?

Answer 11

• On larger or more complex projects, often there will be a quantity surveyor (QS) preparing the valuation for the CA to issue; however, this guidance note covers building contracts where a QS will not be employed and so the CA will be named as the QS in the Articles of the building contract.

Question 12

What should the CA in the event of materials on or off site?

Answer 12

Particular attention should be paid to whether or not the value of materials off site or on site, where they are not fixed to the works, should be included. The CA should be certain that legal title for the materials will pass to the employer if the items have not been fixed and are included in the valuation. To do this the CA may have to see evidence of receipted invoices from suppliers.

Question 13

When is a certificate of vesting required?

Answer 13

Under the Sale of Goods Act, a seller is entitled to retain ownership until paid. The Contractor will therefore not be entitled to payment for products not incorporated into the Works which are subject to reservation of title.

Question 14

What is a certificate of vesting?

Answer 14

A vesting certificate certifies that ownership of the goods, plant or materials listed in a schedule will transfer from one party to the other upon payment and confirming that they will be will be properly identified, separately stored, insured and are free from encumbrances (such as retention of title).

Question 15

What is VAT?

Answer 15

Value added tax is a broadly based consumption tax assessed on the value added to goods and services.

The standard rate of VAT in the UK is 20%

Construction of new qualifying dwellings and communal residential buildings, and certain new buildings used by charities = 0%

Question 16

What are retention monies?

Answer 16

Retention is a percentage (usually up to 5% of the contract sum) of each payment made under a construction contract which is withheld in order to try and ensure that works under the construction contract are completed to the required standard.

Question 17

How are retention monies deducted?

Answer 17

The contract will state the amount to be deducted for retention as a percentage of the sum valued. For valuations issued after practical completion but before the final certificate, the percentage used to calculate the retention will normally be halved.

Question 18

How should Delay and Prolongation Costs be calculated?

Answer 18

based upon a breakdown.

Question 19

What are Delay and Prolongation Costs?

Answer 19

Cots incurred by the main contractor or their subcontractors as a result an extension of time caused by the fault of the employer. Usually in the form of loss and expense claims.

Question 20

How are liquidated damages deducted?

Answer 20

Where the employer intends to deduct liquidated damages the CA must not adjust the valuation of works or the ACS, it is up to the employer to make the adjustments when paying the contractor. Where the employer intends to make such a deduction, there may be a requirement for the employer to give notification to the contractor beforehand.

Question 21

Ho should variations be instructed?

Answer 21

In writing a contract administrators instructions.

Where such instructions give rise to additional costs outside the building contract provisions, or the CA’s appointment, then the employer’s approval for the expenditure will need to be sought before the instruction is given

Question 22

How does the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) apply to payment provisions in the contract?

Answer 22

Stage payment: stage payments or other periodic payments unless the work is specified or agreed between the parties to be less than 45 days.

Dates for payment: provide an adequate mechanism for determining what payments become due and when. Such contracts must also provide a final date for payment in relation to any sum which becomes due.

Prohibition of ‘pay when paid’ clause: any provision in a construction contract which makes payment conditional upon the payer receiving payment from a third person is invalid.

Question 23

What should be in a valid payment notice?

Answer 23

1. The sum which the person giving the notice considers to be, or to have been due at the payment due date; and
2. The basis on which the sum was calculated.

Question 24

What should be in a valid pay less less notice?

Answer 24

To be effective, the pay less notice must be given not later than the prescribed period before the final date for payment and must specify:

1. The sum that the payer considers to be due on the date the pay less notice is served; an
2. The basis on which that sum is calculated.

Question 25

What is the final account?

Answer 25

Preparing the final account is the process of calculating and agreeing any adjustments to the contract sum so that the amount of the final payment can be determined. The amount of the final payment is then set out in the final certificate (or final statement).

Question 26

How is the final account calculated?

Answer 26

1. The original contract sum;
2. Any omissions of provisional sums and provisional work and any adjustments against these sums;
3. All additions and omissions as a result of varied work properly instructed by the contract administrator;
4. All additions and omissions as a result of the issue by the contract administrator of revised drawings and/or specifications resulting in agreed re-measures of quantities; and
5. The addition of money due as a result of loss and/or expense incurred due to the granting of extensions of time.

Question 27

What length of project qualifies for interim payment?

Answer 27

Party to a construction contract in excess of 45 days in duration is entitled to interim or stage payments. Less than 45 days = ‘non qualifying’ under HGRCA 1996.

Question 28

How do you determine the frequency of interim payments?

Answer 28

Parties to a contract are free to agree the amounts of the payments and the intervals at which they become due.

Question 29

What does the Local Democracy, Economic Development and Construction Act 2009 stipulate in relation to payment provisions?

Answer 29

Bolsters right to suspend for late payment.

Payment notice to be issued within five days of the due date.

Payments notices are required to contain the basis on which notified sums are calculated

Question 30

What does the Housing Grants, Construction and Regeneration Act, 1996 stipulate in relation to payment provisions?

Answer 30

Entitlement to interim payment for construction contracts in excess of 45 days in duration.

Due date for payment and final date for payment must be stated in contract.

Prohibition of pay when paid clauses.

Parties may not withhold payment after the final date for payment unless an effective notice of their intention to withhold payment has been given.

Question 31

What are the interim payment provisions under a JCT minor works contract?

Answer 31

Interim valuation - as per contract (typically monthly)
Due date - 7 calendar days following interim valuations date

Issue date - maximum of 5 calendar days following due date

Pay less notice - minimum 5 calendar days before the final date for payment

Final date for payment - 14 days calendar days following due date.

Question 32

When might you issue a pay less notice?

Answer 32

A Pay Less Notice is a written notification from the Payer to the Payee of the Payer’s intention to pay less than the value stated in either their previous Payment Notice and/or the Payee’s application.

Often used by the employer when they want want to reduce the sum certified already in the same payment period.

Question 33

What are the timelines for payment under JCT contracts?

Answer 33

Interim valuation date - as stated within the contract at monthly intervals

Due date - seven days following the interim valuation date

Issue date - maximum 5 days after the due date

Pay less notice - minimum 5 days prior to final date for payment

Final date for payment - 14 days after the due date.

Question 34

What happens if the CA fails to issue a payment certificate within 5 days of the due date?

Answer 34

It means that the CA cannot then issue a payment certificate relevant to that due date. In this event the contractors application for interim payment becomes the payment notice.

The employer can issue a pay less notice to rectify this.

Question 35

How do interim payments work after PC?

Answer 35

The due date for the first interim payment after PC occurs 7 days after the date of PC. An interim certificate must be issued within 5 days of this. Final date for payment then 14 days from due date.

Thereafter payments shall be made at intervals of 2 months.

Question 36

What are the contractor rights to suspension for late payment?

Answer 36

Under HGRCA 1996 right to suspend in the event

• payer has failed to pay the notified sum by the final date for payment and no valid pay less notice has been issued
• A party must provide 7 days notice of their intention to suspend.

Question 37

What are the criteria for a provisional sum to be defined under NRM 2?

Answer 37

A sum provided for work which is not completely designed but for which the following information shall be provided:

– the nature and construction of the work;

– a statement of how and where the work is fixed to the building and what other work is to be fixed thereto;

– a quantity or quantities that indicate the scope and extent of the work; and

– any specific limitations and the like identified.

Question 38

What are the criteria for a provisional sum that is undefined under NRM 2

Answer 38

Means a sum provided for work that is not completely designed, but for which the information required for a defined provisional sum cannot be provided.

Question 39

Who would enter a figure for a provisional sum in the contract?

Answer 39

The consultant. This would allow fair comparison.

Question 40

What are the options for paying for materials off site?

Answer 40

Vesting certificate

Advanced payment bond

Question 41

What are fluctuations?

Answer 41

Traditional procurement seeks to obtain a ‘Fixed’ price contract, in so far as it is not usually adjusted for changes in the cost to the contractor of labour, materials and plant that become apparent during the contract period. This can cause the contractor to price in risk.

Using a fluctuating price contract, the employer is not bound by the contractors estimate of the change in cost, they only pay what is actually incurred.